From mortgage-backed securities and collateralized debt obligations in the run-up to the 2008 Global Financial Crisis to digitized bank runs in the Silicon Valley Bank Collapse, a common thread emerges: the advent of financial innovations arrives with promises of efficiency and democratization, only for policymakers to discover that institutional guardrails were undeveloped relative to the scale of transformation put into motion. The proliferation of central bank digital currencies (CBDCs) as an alternative to conventional cryptocurrencies, and even cash and traditional banking, constitutes not only the latest innovation but a recalibration of monetary architectures.

This paper will first consider the status quo financial structures upon which a CBDC would establish itself. It will then address the unfolding global interest in the development of CBDCs, before shedding light on the public discourse surrounding the development and implementation of a retail US CBDC and, against the backdrop of competing interpretations, will assess the macroeconomic impacts and welfare considerations of its adoption.

 

The Traditional Apparatus

A CBDC would differ from the existing financial landscape, characterized by banknotes and government bonds, in a few ways. Broadly speaking, a CBDC is an interest-bearing digital representation of a sovereign currency issued by a central bank (or an equivalent monetary authority), thereby making its issuance a central bank liability. With the proviso that certain technology needs are met, the general public could hold CBDC balances directly with the central bank instead of maintaining balances in a traditional checking account with a commercial bank. Since a CBDC would be remunerated, balances serve as an investing and savings vehicle analogous to bank deposits, money market funds, and short-term government securities, contrasting with a speculative asset like private cryptocurrency.

The perceived incentive of an interest-bearing CBDC would likely induce a shift away from banknotes, which have a zero nominal return. A CBDC would not simply be the digital representation of a sovereign currency; it could become an investment vehicle with interest paid on amounts held with the central bank. Thus, a CBDC would compete more directly with bank deposits, money market funds, and even government bonds. If a central bank pays an interest rate near the policy rate, demand for short-term government securities and money market instruments could suffer. The implication for consumers is coexistence through increased competition, rather than the outright substitution of assets like bank deposits and short-term government instruments. The integration of a CBDC alongside existing assets would compel financial institutions to adapt through higher remuneration on deposits, as opposed to absolute displacement of cash, checking accounts, and bonds.^[1]

Though some core characteristics are shared between a retail CBDC and private cryptocurrencies, they are distinguishable in more ways than one. A cryptocurrency is a digital asset issued and circulated by private actors, operating on a decentralized and autonomous algorithm. Cryptocurrencies behave more like speculative assets than money from a store-of-value perspective due to high volatility and lack of backing, but a CBDC endeavors to minimize, or perhaps eliminate, transaction costs by tethering consumers directly to the central bank, obviating intermediaries.

A CBDC inherently derives its credibility from sovereign backing, while private cryptocurrencies depend on market sentiment and algorithmic scarcity. Since the value of a CBDC is anchored to its corresponding national unit at a determined rate, it may be less susceptible to the price volatility that prevents private cryptocurrencies from being a true medium of exchange. Additionally, widespread adoption of a CBDC in an economy could initiate a pivot away from private cryptocurrency usage, as the transaction costs of cryptocurrencies are assumed directly by the consumer. Overall, the implementation of a CBDC would bring about competition and changes in usage of existing assets, including private cryptocurrencies and commercial bank deposits.^[2]

 

Global Emergence of CBDCs

A survey of CBDC adoption conducted in 2021 observed that 86% of central banks were actively researching the possibility of issuing a CBDC, 60% of central banks were in the technology experimentation phase, and 14% were in the development or pilot stages of a CBDC (e.g., the Bahamas, Nigeria, China, etc.).^[3] Except for Switzerland and the US as reserve currency countries, the usage of cash has diminished globally, a trend that is likely to endure as older generations make way for ones more technologically adept.^[4] The waning preference for cash serves as the basis of central bank interest in the development of a CBDC.

As the global consideration of CBDCs increases, it is important to understand both the utility and limitations of their application. Despite the historical success of the current system in driving global wealth creation and connectivity, the volatility of financial crises has prevailed alongside other unmet needs that a CBDC could address. First, widespread usage of a CBDC in an economy could reduce the costs associated with the provision of cash. The euro area^[5] incurs a cost equivalent to 0.5% of its GDP in issuing and managing cash, but problematically, the expense is relatively outsized for households and firms, being the main users and handlers of cash through the social costs of handling: time and travel costs, storage risk, and transaction fees.^[6] Contingent upon design features, a CBDC may be more energy efficient than the current payment landscape, including debit and credit cards. For payment settlement, debit and credit cards necessitate the physical infrastructure of bank-to-bank messaging and third-party processing, while mining traditional cryptocurrencies can be energy-intensive. With a CBDC, fewer payment actors are required, settlement is near-instant, and central bank backing replaces mining. A CBDC would not only reduce the costs of producing and managing cash and other payment methods, but it may also reduce an economy’s energy footprint.^[7]

Second, due to its digital nature, formalization of a CBDC could improve a central bank’s access to more granular data by tracking movements of capital while bolstering the efficiency of domestic payment systems through near-instant settlement, reduced reliance on intermediaries, and lower transaction costs, leading to a greater degree of financial inclusion.^[8] Third, the relationship between a CBDC and the zero-lower bound on interest rates could have considerable monetary policy implications, which will be discussed further in a later section of this paper.

While implementing a CBDC has many benefits, policymakers must also consider legal constraints and macroeconomic effects. Multiple countries would be obliged to revise or even create new central bank and monetary case law to legalize a CBDC, as most legal structures are ill-adapted to support its institutionalization.^[9] Internationally, there is also an observable disparity in potential adoption behavior among countries. The same countries that would theoretically benefit from a CBDC vis-à-vis financial inclusion and payment efficiency gains also lag in adoption capacity, mainly due to large informal sectors and a lack of familiarity with robust digital payment infrastructure.^[10]

A CBDC may broaden the horizons of macroeconomic policy by facilitating policy transmission to a bigger population, but the possibility of bank disintermediation, which this paper will elaborate on in a later section, is equally deserving of attention. Ultimately, a CBDC is far from a panacea for the financial system, but it can be a tool for some economies to revitalize efficiency in payment infrastructure and spearhead monetary easing in times of crisis.

 

The Macroeconomics of a CBDC

The possible expansion of macroeconomic frontiers, aided by the introduction of a CBDC, must be evaluated against the backdrop of a diminishing role of cash and deposit activity in commercial banks. The waning preference for cash is a concern for central banks, as the domination of the payment systems by private firms would challenge the independence of the central bank to affect monetary policy.^[11]

Proponents of CBDC often contend that enhancing the central bank’s ability to administer negative interest rates carries monetary benefits. Since cash maintains a zero nominal interest rate, economists have highlighted that a negative interest rate on alternative assets would lead to their abandonment. Under exceptional deflationary pressure, a central bank needs to have the latitude to reduce interest rates below zero to accelerate investment. However, the experiences of advanced economies suggest that moderately negative interest rates were already feasible under existing monetary arrangements. The European Central Bank and the Bank of Japan, more notably, have cyclically performed negative interest rate policies under deflationary pressures, but have since abandoned the posture. Hence, many central banks of more developed countries do not commonly cite breaking the zero lower bound as a rationale for CBDC adoption.^[12]

Though wider usage of CBDC in an economy instead of cash may aid central banks in navigating extreme crises vis-à-vis negative interest rates, the uncommon nature of crises in themselves shifts the discussion regarding a CBDC elsewhere. Ironically, the same argument may be even less relevant for emerging economies. These markets persistently grapple with inflationary episodes, weak institutions, and large capital outflows, exhibiting upward biases in setting interest rates, so the effective lower bound is far from an exigent need.

Interestingly, the bulk of the current literature focuses on the ramifications of a CBDC for the banking sector. As prefaced, an interest-bearing CBDC would compete directly with commercial bank deposits, and consumers could open accounts directly with the central bank. Commercial banks and other private financial institutions would then compete with the central bank in their role as the eminent liquidity and maturity transformers. A CBDC may trigger bank disintermediation, the process of bypassing traditional banks to deposit, borrow, and invest. A CBDC would only be the latest iteration of a recurring theme: the attractiveness of alternative assets migrates funds away from bank deposits. For example, the enactment of Regulation Q in the US, which capped bank deposit rates in tandem with elevated interest rates in the 1970s, laid the groundwork for depositors to consider alternative arrangements in the form of money market funds. In essence, depositors were given an incentive to look beyond the banking system for short-term investments. An interest-bearing CBDC would be quite comparable as a novel source of competition for consumers to reallocate funds to a state-backed alternative. Systematically, the CBDC could de-leverage banks in the form of lost deposits and constrained balance sheets.

Instead, the cogent argument in favor of CBDC adoption for emerging economies is to underpin financial inclusion efforts and address underbanking issues. In the existing fiat currency system, banking services can be difficult to obtain in underpopulated rural areas. Some of the primary barriers, like distance to the nearest branch and high transaction costs and associated fees, could be redressed by a CBDC. Through a CBDC offering, a central bank can become the benefactor for the underbanked when commercial banks fail to service dispersed populations. By digitizing value chains and enlarging the scope of the digital economy, an interest-bearing CBDC could be fruitful as an alternative means of payment, presupposing consumer access to minimum levels of technology.

 

The US: What is the Discourse? 

Although a plethora of countries have initiated research and development seeking to recalibrate their financial systems, the US has adamantly opposed a CBDC of its own. Pending Senate and executive approval, the House of Representatives has already passed the Anti-CBDC Surveillance Act, which would prohibit the Federal Reserve from offering direct services.^[13] The current administration has also proclaimed “measures to protect Americans from the risks” of CBDCs, precluding the possibility of a CBDC for the foreseeable future.^[14]

From the US vantage point, the argument against a CBDC does not categorically undermine its rationale. After all, a CBDC could drive welfare gains for households as an alternative to commercial deposits. Rather, it interrogates the potential for privacy erosion and whether a CBDC conforms to the US’s institutional particularities. Privacy is normatively considered an indispensable tradition of the American system, but by institutionalizing a direct connection with the Federal Reserve, the belief held is that a CBDC would give the government coercive power through financial surveillance to monitor transactions. This is overwhelmingly corroborated by consumer preferences in the US, where 85% of Americans would “prefer to keep their money in a private bank rather than in an account operated by the Federal Reserve.” As government trust declines in the US, so will support for CBDC adoption.^[15]

Of greater relevance, the US already enjoys deep and sophisticated capital markets, diverse sources of private credit, and increasingly interoperable retail payment systems. The confluence of these strengths makes the case for CBDC one of limited added value. Though the prospect of broadening financial inclusion and enhancing the efficacy of existing payment infrastructure is enticing, the US struggles with a different consideration set by virtue of its comparative advantages. Opposition may also derive from entrenched stakeholders who earn economic rents from the current system.  Incumbents may resist CBDC adoption through lobbying.^[16] The question for policymakers is whether a US CBDC delivers sufficient incremental value to consumers through payment resilience to offset, or at least justify, the risks of banking disintermediation.

 

Welfare Considerations

As prefaced, the formalization of a CBDC would deliver dissimilar welfare gains across economies, but the developing world may prevail with the most to gain. The World Bank Group has reported that nearly 65% of adults inhabiting low-income economies “lack access to even the most basic transaction account.” The crux of global underbanking lies not in the fiat system itself, but in accessibility issues through which fiat currency is intermediated. It is precisely where the physical footprint of commercial banking remains deficient that a CBDC can best broaden participation in the economy. Though not as particularly acute, identification and credit history barriers prevent many from opening an account in developed nations as well. By utilizing innovative digital wallets with a state’s central bank, a CBDC could enable the financially marginalized to “build their financial identity and create the credit history needed to access mainstream financial services.”^[17]

Once consumers can enter the realm of financial services, they would further enjoy the liquidity benefits of an interest-bearing CBDC that would compete with existing payment systems and bank deposits. Since central banks would maintain relatively low (or zero) transaction fees, a CBDC could alleviate frictions in both large-value and small-value retail payments. Some consumers hesitate to conduct online purchases for security and privacy reasons, but an anonymous CBDC would limit potential losses to fraud to the singular purchase, as opposed to an account where a malignant agent can use information to conduct a stream of fraudulent transactions.  Moreover, the banking sector may be expected to compete by increasing interest on payment balances or by cutting overdraft fees, so consumers would yield a narrower deposit spread, or the difference between what banks earn on assets and what they pay on depositors. Exorbitant checking account overdraft fees became commonplace so that banks could profit on low-balance accounts.^[18] Especially in countries that lack sophisticated alternatives to escape low deposit rates or high fees, a CBDC could drive higher returns on savings for those who continue to engage with the commercial banking sector.

 

Conclusion

Though the macroeconomic and welfare gains may be smaller for advanced economies, a well-designed CBDC would still bring benefits.  In fact, maximizing collective benefit presupposes CBDC existing alongside cash and bank deposits, not absolute replacement, so the design of the CBDC is of paramount importance. A standard interest-bearing CBDC that induces public-private competition would give US consumers optionality, higher savings, and ease of payment. If privacy is a significant enough concern, the US could pursue democratic constraints that make provisions for privacy guarantees and potentially give breathing room to the private sector. By extension, a democratic-capitalist CBDC could be two-tiered, where the central bank issues and backs the currency while private sector intermediaries handle distribution and client-facing services, a public-private partnership for modern banking. Not only would this inhibit bank disintermediation, but it could also insulate CBDC users from government surveillance.

Taken together, the CBDC story is one compelling enough to garner global interest and force central banks to rethink the financial apparatus. Through integration of a CBDC alongside physical cash and bank deposits, consumers would be given a degree of substitutability while restraining investment in unstable private cryptocurrencies. By understanding the benefits of CBDC adoption in conjunction with its potential drawbacks, central banks must assess their macroeconomic priorities to ensure alignment. The proposal is inviting for low- and medium-income countries looking to expand access to direct banking and steward efficient payment infrastructures. Though the calculus may differ among countries, the US must also reckon with its own internal discourse regarding CBDC. A CBDC is not necessarily a one-size-fits-all, but its adoption could expand a central bank’s macroeconomic toolkit. For the 14.2% of US households that remain underbanked, a CBDC may be a worthwhile endeavor.^[19]

 

 

 

 

 

 

 

^[1] Francesca Carapella and Jean Flemming, “Central Bank Digital Currency: A Literature Review,” FEDS Notes (Board of Governors of the Federal Reserve System), November 9, 2020, https://doi.org/10.17016/2380-7172.2790.

^[2] Salomé Bernhart, “Applications of CBDCs and Private Stablecoins: Comparative Analysis” (master’s thesis, FHWien der WKW University of Applied Sciences for Management and Communication for Management and Communication, 2020), accessed July 1, 2026, https://www.researchgate.net/profile/Salome-Bernhart/publication/344233205_Applications_of_CBDCs_and_private_stablecoins_Comparative_analysis

^[3] Peterson K. Ozili, “Central Bank Digital Currency Research around the World: A Review of Literature,” Journal of Money Laundering Control 26, no. 2 (2023), https://doi.org/10.1108/JMLC-11-2021-0126.

^[4] Tommaso Mancini Griffoli, Maria Soledad Martinez Peria, Itai Agur, Anil Ari, John Kiff, Adina Popescu, and Celine Rochon, Casting Light on Central Bank Digital Currencies, Staff Discussion Notes 2018, no. 008 (2018), Article A001, https://doi.org/10.5089/9781484384572.006.A001.

^[5] Euro area refers to the member states in the European Union that have adopted the euro as their official currency and are subject to the policy of the European Central Bank.

^[6] Mancini Griffoli et al., Casting Light on Central Bank Digital Currencies.

^[7] Itai Agur, Xavier Lavayssière, and Germán Villegas Bauer, “How Crypto and CBDCs Can Use Less Energy Than Existing Payment Systems,” IMF Blog, June 16, 2022, https://www.imf.org/en/blogs/articles/2022/06/16/how-crypto-and-cbdcs-can-use-less-energy-than-existing-payment-systems.

^[8] Bank for International Settlements, CBDCs: An Opportunity for the Monetary System, Annual Economic Report 2021, chap. 3 (Basel: Bank for International Settlements, June 23, 2021), https://www.bis.org/publ/arpdf/ar2021e3.htm.

^[9] Wouter Bossu, Masaru Itatani, Catalina Margulis, Arthur D. P. Rossi, Hans Weenink, and Akihiro Yoshinaga, Legal Aspects of Central Bank Digital Currency: Central Bank and Monetary Law Considerations, IMF Working Paper No. WP/20/254 (Washington, DC: International Monetary Fund, November 2020), https://doi.org/10.5089/9781513561622.001.

^[10] Ozili, “Central Bank Digital Currency Research around the World.”

^[11] Tommaso Mancini Griffoli et al., Casting Light on Central Bank Digital Currencies.

^[12] Chao Deng, Jie Li, Wenyan Wang, and Tianhang Zhou, “The Zero Lower Bound and Central Bank Digital Currency,” Journal of International Money and Finance 167 (2026): 103629, https://doi.org/10.1016/j.jimonfin.2026.103629.

^[13] H.R. 1919, Anti-CBDC Surveillance State Act, 119th Cong. (2025), congress.gov/bill/119th-congress/house-bill/1919.

^[14] Executive Order 14178, Strengthening American Leadership in Digital Financial Technology, January 23, 2025, https://www.whitehouse.gov/presidential-actions/2025/01/strengthening-american-leadership-in-digital-financial-technology/

^[15] Emily Ekins and Jordan Gygi, “New Poll: Only 16% of Americans Support the U.S. Adopting a Central Bank Digital Currency, 68% Would Oppose if Gov’t Could See What You Buy,” Cato at Liberty, May 31, 2023, https://www.cato.org/blog/new-poll-only-16-americans-support-us-adopting-central-bank-digital-currency-68-would-oppose.

^[16] “ICBA Opposes U.S. Central Bank Digital Currency,” Independent Community Bankers of America, May 23, 2022, https://www.icba.org/w/icba-opposes-u.s.-central-bank-digital-currency.

^[17] Alex Cravero, Clive Cunningham, Harry Evans, Pablo Garcia Mexia, Charlotte Henry, Rachel Lidgate, and Susannah Wilkinson, “Global Bank Review: Central Bank Digital Currencies and ESG – A Sprint across the World,” HSF Kramer Insights, November 9, 2021, https://www.hsfkramer.com/en_US/insights/2021-11/global-bank-review-central-bank-digital-currencies-and-esg-%E2%80%93-a-sprint-across-the-world.

^[18] Paola Boel and Peter Zimmerman, Unbanked in America: A Review of the Literature, Economic Commentary No. 2022-07 (Cleveland: Federal Reserve Bank of Cleveland, May 26, 2022), https://doi.org/10.26509/frbc-ec-202207.

^[19] Federal Deposit Insurance Corporation, 2023 FDIC National Survey of Unbanked and Underbanked Households, November 14, 2024, https://www.fdic.gov/household-survey